Tag Archive for: rental income

DSCR Loans Explained

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What Is a DSCR Loan?

Real estate investors are always looking for easier ways to buy rental properties. That is exactly why many investors are asking about DSCR loans right now. So, let’s break it down simply. DSCR Loans Explained: 5 Essential Requirements to Get Approved starts with understanding what a DSCR loan actually is. DSCR stands for Debt Service Coverage Ratio. In simple terms, the lender wants to know one thing:

Does the property income cover the property expenses?

Unlike many traditional loans, DSCR loans focus on the property instead of your personal income. Therefore, many investors love them because they do not need to show years of tax returns, business income, or long job histories.

Instead, the lender mainly looks at:

  • Rental income
  • Property expenses
  • Credit score
  • Loan-to-value
  • Reserves

As a result, DSCR loans have become one of the most popular tools for rental property investors.

Why Real Estate Investors Like DSCR Loans

Many investors get frustrated with traditional loans. For example, banks may ask for:

  • Tax returns
  • W-2 income
  • Business history
  • Debt-to-income ratios
  • Employment history

However, DSCR loans work differently. Instead, the property itself does the heavy lifting. If the rental income covers the required expenses, the property may qualify.

Because of that, DSCR loans can work well for:

  • New investors
  • Self-employed borrowers
  • Retirees
  • Investors with large write-offs
  • Investors buying properties in LLCs

In addition, these loans can often be used for:

  • Purchases
  • Cash-out refinances
  • Rate-and-term refinances

Requirement #1: The Property Must Have Strong Rental Income

This is the biggest key to DSCR approval. The lender wants to see that the rent covers the main property expenses. Therefore, the property must produce enough income to support itself.

The 5 Expenses Lenders Look At

DSCR loans mainly focus on these five expenses:

  1. Principal and interest payment
  2. Property taxes
  3. Insurance
  4. HOA dues
  5. Flood insurance if required

If the rent is equal to or greater than those expenses, the property may qualify.

Example

Let’s say:

  • Rent = $2,400 per month
  • Mortgage payment = $1,700
  • Taxes = $250
  • Insurance = $100
  • HOA = $100

Total expenses = $2,150

Since the rent is higher than the expenses, the property may work for a DSCR loan.

What DSCR Loans Usually Do NOT Count

This surprises many investors.

DSCR underwriting normally does not include:

  • Utilities
  • Maintenance
  • Vacancy costs
  • Property management fees
  • Trash service

That is one reason why many investors like DSCR loans. The calculations are usually simpler than traditional investment property loans. However, smart investors should still budget for those costs anyway.

Requirement #2: Good Credit Matters

Next, let’s talk about credit scores.

Although DSCR loans are flexible, credit still matters a lot. Better credit usually means:

  • Lower interest rates
  • Better loan terms
  • Higher loan-to-value options
  • Easier approvals

What Credit Score Is Needed?

Typically:

  • Around 660 may open the door
  • Mid-to-high 700s usually get the best pricing

That difference matters.

For example:

  • A borrower with a 660 score may receive a much higher rate
  • Meanwhile, a borrower with a 760 score may get a lower rate and higher leverage

Therefore, improving your credit can directly improve your cash flow.

Another Helpful DSCR Feature

Sometimes investors buy properties with partners or spouses. In many cases, lenders may allow the stronger borrower’s credit score to help the deal. That can make approvals easier for investment groups and partnerships.

Requirement #3: Understand Loan-to-Value (LTV)

The next key is understanding loan-to-value, also called LTV. LTV simply means: How much the lender is willing to lend compared to the property value.

Typical DSCR Loan Limits

Most standard DSCR loans allow:

  • Up to 80% LTV on purchases
  • Up to 75% LTV on refinances

Simple Example

Let’s say:

  • Property value = $300,000
  • Maximum LTV = 75%

The lender would multiply:
$300,000 × 75%

That equals:
$225,000 maximum loan amount.

Therefore, the investor would need to bring in the remaining funds plus closing costs.

Requirement #4: The Property Type Must Fit DSCR Rules

Not every property works for a DSCR loan.

Most standard DSCR lenders focus on:

  • Single-family homes
  • Duplexes
  • Triplexes
  • Fourplexes

In addition, the property must be:

  • Rental ready
  • Non-owner occupied

That means you cannot live in one of the units.

Why Single-Family Homes Often Get Better Pricing

Interestingly, many lenders offer their best pricing on single-family rental properties.

Meanwhile, some lenders may lower the LTV on:

  • Triplexes
  • Fourplexes

Therefore, investors should always check property guidelines before making offers.

Requirement #5: You Need Reserves

Finally, lenders want to see reserves.

Reserves are funds you still have available after closing. These funds may include:

  • Savings accounts
  • Retirement accounts
  • Investment accounts
  • Mutual funds

How Much Is Usually Needed?

Most lenders want:

  • 3 to 6 months of reserves

That means enough money to cover several months of payments if something unexpected happens.

For example:
If the total monthly payment is $2,000:

  • 3 months reserves = $6,000
  • 6 months reserves = $12,000

Because rental properties can have vacancies and repairs, lenders want to see a safety cushion.

What DSCR Loans Usually Do NOT Care About

This is one reason investors get excited about DSCR loans.

Unlike many traditional loans, DSCR loans often do not focus heavily on:

  • Personal income
  • Business income
  • Time in business
  • W-2 income
  • Tax return write-offs

Instead, the property income becomes the main focus.

Therefore, many beginner investors can qualify sooner than they expected.

Why DSCR Loans Are Great for Beginners

Many investors think they need:

  • Years of experience
  • Large companies
  • Huge incomes
  • Multiple rentals

However, that is not always true.

Many beginner investors qualify because they:

  • Have decent credit
  • Buy a rental-ready property
  • Find a property with good rents
  • Keep reserves available

As a result, DSCR loans can help newer investors start building rental property cash flow faster.

Before You Apply for a DSCR Loan

Before you submit an offer or talk to a lender, run your numbers first.

Make sure you verify:

  • Real market rents
  • Current taxes
  • Insurance costs
  • HOA dues
  • Flood insurance if needed

In addition, understand your:

  • Credit score
  • LTV needs
  • Reserve requirements

The investors who prepare before they apply usually have a smoother process.

Final Thoughts on DSCR Loans

DSCR loans continue to grow because they solve a major problem for real estate investors. Instead of making the borrower jump through endless income paperwork, these loans focus on the property itself.

That makes them:

  • Easier to understand
  • Faster to review
  • More flexible for investors

Most importantly, they help investors scale rental portfolios without relying heavily on traditional income documents. So, if you are looking at rental properties, now is a great time to learn how DSCR loans work and test your deals before you buy.

Watch our most recent video to find our more about: DSCR Loans Explained: 5 Essential Requirements to Get Approved

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What Is a DSCR Loan – and What Can You Do With It?

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When should you use – and what is – a DSCR loan?

One of the most-asked questions we get:

“What is a DSCR loan?”

Where does it fit? What can we do with it? What do we need in order to get one?

In this post, we’ll go over: what is a DSCR loan, why it’s great, and where you should never use it.

What Is a DSCR Loan?

A DSCR loan replaces a conventional loan for investors. It’s never used for owner-occupied properties.

These loans are relatively simple:

  • There are no personal income requirements (no W-2s, tax returns, etc). Instead, it’s all based on the income and expenses of the property.
  • There are no business or experience requirements. Bank or conventional loans require a business to exist for 2 years or more before they’ll lend to you.
  • They don’t need to see your portfolio. For other loans, lenders may ask to see what other properties you’ve flipped or rented. DSCR loans only care about the rental property at hand.

DSCR loans come in all shapes and sizes (3-year, 5-year, 30-year, 40-year), with a broad variety of details depending on lenders.

What Is the “DSCR” Part?

A debt service coverage ratio loan focuses on the debt ratio of the property. Does the rent pay for the expenses?

  • Rent – The monthly income a property receives from tenants, based on comps.
  • Expenses – Only mortgage payment, interest, taxes, insurance, and HOA fees. DSCR loans do not consider utilities, property management, or other expenses in this calculation.

One way to think of this ratio is: do you at least break even on this property?

To calculate a DSCR loan: Does Rent ÷ Income equal 1? If yes, you exactly break even. If it’s more than 1, then you have cash flow (and getting a DSCR loan will be even easier). But if this number is less than 1, the property costs more than it makes, and you’ll need a special kind of DSCR loan, likely with worse terms.

What Are DSCR Loans Based On?

Aside from a rental with a ratio of 1 or more, there are four main considerations in a DSCR loan:

  1. Credit Requirements – Most DSCR loans look for borrowers with a 660 credit score or above. The better your credit, the better the LTV and interest rates you’ll get. With current high interest rates, you’ll want to have a score of 700 or more to get something affordable.
  2. LTVs – The loan-to-values DSCR lenders will give vary between 75 and 85 percent. For 80-85%, you can expect higher rates or higher fees.
  3. Type of Property – DSCR loans are good for up to 8-unit properties or mixed-use. Conventional loans only go up to 4 units and are much less flexible.
  4. Location – DSCR lenders are centralized in major metropolitan areas. If you’re investing in a smaller community (population of 25,000 or less), you’ll have a tougher time getting a DSCR loan.

Benefits of a DSCR Loan

Let’s go over all the positives of a DSCR loan:

  • No income requirements for you – just the property.
  • It doesn’t matter how old your business is.
  • You can write everything off on your tax returns.
  • Lenders don’t consider your other properties in the underwriting.
  • You can buy in an LLC or company name.
  • They have interest-only DSCR options.
  • There is a variety of term lengths – from 3-year adjustable to 40-year fixed.
  • They can be used for short-term rentals, like Airbnb or VRBO.
  • A DSCR loan is a perfect long-term refinance loan for a flip project. It works great with BRRRR.

Downsides of a DSCR Loan

As a disclaimer to start: you should always shop around for DSCR loans.

There is no universal underwriting for DSCR, so every lender will be a little bit different. This product is extremely segmented. So while one lender might have a deal-breaking con, another one will have all the pros you’re looking for.

That being said, let’s look at some of the potential pitfalls of a DSCR loan compared to a conventional loan.

Interest Rate

A DSCR loan will have an interest rate somewhere between 1-3% higher than a conventional loan. Because, unlike the conventional market which is controlled by two pseudo-government agencies (Fannie and Freddie), DSCR is made up of hundreds of different investors who design these products. One lender may offer a rate of 6%, while the same client at another lender could only get 8-9%. 

 Prepayment Penalty

There are only a few states where DSCR loans don’t have prepay penalties. With a prepay penalty, there is a period (usually 3-5 years) where you must pay a fee if you want to pay off the loan. If you think you’ll want to sell or refinance the property within that time frame, DSCR might not be a cheap option for you.

For Rentals Only

DSCR loans are designed for investors with rental properties. You cannot use a DSCR loan for an owner-occupied property (aka, your personal home). These are business-based loans, so they do not follow the same standards as personal mortgages.

Credit

Since DSCR loans don’t look at your income, they do rely heavily on your credit score. Without a good score, you’ll have a hard time getting a DSCR loan (or at least one with decent rates).

Community and Loan Size

Lastly, DSCR loans aren’t ideal for smaller communities or projects. DSCR lenders typically only lend in cities with a population greater than 25,000. The lowest loan they’ll give is generally around $75,000.

How Do You Find the Right DSCR Loan

It’s always important to shop around for the best leverage, but this is especially true for the segmented market of DSCR loans.

Not sure where to start? Reach out to us at Info@TheCashFlowCompany.com.

We work with 10-15 different DSCR wholesale companies to find the best rates, highest LTVs, and lowest credit requirements.

Want to figure out if your deal works with a DSCR loan before reaching out? Check out this free DSCR calculator.

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How To Refinance and Boost Your Cash Flow

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How To Refinance and Boost Your Cash Flow

Today, let’s explore how to refinance and boost your cash flow.

It’s probably pretty safe to say that in the real estate world, cash flow is KING!  Because cash flow makes life flow.

But what does cash flow mean to you? Because it comes in all shapes and sizes.

What cash flow means to one investor might be very different from another.

Let’s look at an example.

We have 3 real estate investors: John, Jane, and Jack.

John likes to focus on putting less money down so he can keep more money in his pocket.

Jane likes to focus on making consistent monthly income.

And Jack likes to focus on using cash-out refinancing to gain the most leverage.

Today, let’s take a closer look at Jack’s strategy.

It’s a simple one, but popular, especially during a refinance boom.

Essentially, Jack likes to refinance all of his value-add properties every 3-5 years so he can unlock his equity and bring more money into his life. He can use this money for personal or business matters, but it’s usually for something personal.

Now let’s break this simple strategy down a bit more.

So, Jack owns 3 properties.

He bought each one for $100K.

After 3 years, each property gains $25K in equity. So, Jack refinances and takes the $25K out of each property. All because he wants to use the money for…whatever! Maybe he wants to pay off his credit cards, buy another value-add property, or go on an epic skiing trip to the Alps. The sky’s the limit.

Well, mostly.

Once Jack has this money, he relaxes for another 3-5 years. Then, if interest rates drop, or he gains more equity, or both, he’ll refinance again. And, again, he’ll use the money for whatever he needs or wants in life.

The process repeats over and over until Jack decides to sell his properties or find a different cash flow strategy.

Now, Jack’s method of refinancing isn’t for everyone. But it’s definitely a popular cash flow strategy that many investors enjoy using.

Is it the right strategy for you? Our team is here and ready to help you discover the best path for you.

Happy investing!

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